Advisory scorecard lends telling insights

BarbaraC. Costanza

LOS ANGELES (CBS.MW) -- A review of the latest scorecard of company "pre-announcements" regarding their expectations for first-quarter results indicates some pleasant surprises may be in store for investors.

For starters, pre-announcements (829 at last count) are running at a rate 20 percent lighter than in the year-ago period (995) -- and more than 35 percent lighter than in the fourth quarter of 2001.

"That's a significant improvement" in terms of the number of companies sticking by their earlier forecasts, noted Ken Perkins, research analyst at Thomson Financial/First Call, the authoritative source for data on Wall Street's parade of profit revisions.

More important, Perkins noted that the proportion of upward to downward revisions is starting to reverse course compared with the year-ago period.

So far, earnings warnings make up 49 percent of the pre-announcements total for the latest quarter, while last year warnings accounted for 70 percent of the total.

On the positive side, above-consensus pre-announcements account for 30 percent of this quarter's total -- more than double last year's 14 percent.

Put another way, the first quarter also looks brighter in that for every positive pre-announcement, there's been 1.6 negative pre-announcements -- a drastic change from the year-ago ratio of one to five and slightly better than the fourth quarter's ratio of one to 1.8.

These trends would appear to unmistakably point to a turnaround from the trough in year-over-year profit comparisons seen during 2001.

Sectors of concern

All the same, there remains reason for worry about the state of corporate profits. Technology is one of the top concerns on Wall Street, with a total of 251 pre-announcements seen for the first quarter.

But of that total, warnings only make up 54 percent. That's down compared with the year-ago period, when warnings accounted for 75 percent of pre-announcements.

And technology companies have come forth with positive pre-announcements making up 26 percent of the total for the latest quarter, far ahead of last year's 12 percent.

This past week, Dell Computer
DELL
issued a decidedly positive revision, saying quarterly revenue would beat its previous forecast because of increased demand from U.S. corporate customers. Western Digital
WDC, -3.93%
also upped its targets for revenue, unit shipments and earnings for its third quarter. (This corrects the previous report, which stated the company warned.)

Not everyone on Wall Street is convinced, however -- UBS Warburg, for one.

While there's a positive undertone, the brokerage said recent data cast "further doubt" on any economic strength that might be felt within the PC hardware sector. The firm urged clients to instead go with defensive plays like Microsoft
MSFT, -1.70%
and IBM
IBM, -1.26%
"because of their recurring profit engines and superior product offerings."

Apple Computer
AAPL, -1.92%
also appears to be a concern for some analysts this quarter. J.P. Morgan and UBS Warburg have both reduced their revenue estimates, citing higher equipment costs and a $100 increase in the price of its iMac. Currently, the consensus of estimates among analysts who follow Apple stands at 10 cents a share.

Beyond the box makers, a large portion of the technology warnings is coming from the software side. In the space of a few days, warnings surfaced from MRO Software
MROI
Onyx Software
ONXS
Compuware
CPWR, +4.17%
Brio Software
BRIO, +1.12%
Inktomi
INKT
and BroadVision
BVSN, -0.12%

And as for a segment that's been in the doldrums for quite some time, there's been a bit of excitement in the telecommunications sector of late over capital spending.

But Deutsche Bank Securities' analyst George Notter noted that such enthusiasm is unwarranted. The analyst also advised that investors continue to assign an underweighting to telecom equipment in their portfolios.

Robertson Stephens' analyst Paul Johnson agrees, saying there needs to be more in the way of evidence of future capital-spending increases and improved data revenue.

Hot spots

While positive pre-announcements are scattered across most sectors -- including some in technology -- defensive plays are still considered the best bets for the first quarter, according to First Call's Perkins.

As the U.S. economy continues to work through last year's short-lived recession, the consumer staples sector is projected to grow quarterly profits by 15 percent and could turn out to be the chart-topper this quarter.

Health care is expected to show growth of about 10 percent and end up taking second place for top-performing sectors, with financials trailing in third place.

Reflecting expectations for an economic upturn, automotive-related stocks could turn out to be another crowd pleaser for the quarter.

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